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“If no one ever took risks, Michaelangelo would have painted the Sistine floor.” -Neil Simon
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This week is the 52nd issue of Moneyball Judaism. If you were one of the slightly under 200 people who subscribed before issue number one, thank you for trying this out when I had no idea if this would work. If you are one of the 1,400 subscribers who joined in September 2022, I’m grateful for every one of you.
As I reflect on the decision to start Moneyball Judaism, I find myself thinking about loss.
While it is 100% true that Moneyball Judaism is my philosophy of how Jewish organizations can function better, truthfully, I started this newsletter because I found myself with lots of free time.
Free time is a funny thing. On the one hand, blessed with lots of unexpected free time, I spent time on projects I never had the time to do, an unalloyed good. On the other hand, unexpected free time tends to come from a life change that brings transition or loss.
And if you asked me two years ago how I would feel about loss and gain not knowing the future, I would choose the status quo every time. What I might gain would not enter the picture.
I suspect many of you are the same, bringing us to this week’s heuristic.
Pretend it is September 30, 2008, and you have an impressive cash infusion in your bank account.
Being the industrious person you are, you decide to invest the money in the stock market. In your first meeting with your financial advisor, they suggest that you pick a stock to anchor this new account, and give you two options:
Which stock should you buy?
Hindsight Bias is a powerful force, and I assume that your initial reaction is that, obviously, you should invest in Amazon. Looking at stock prices today, it’s hard to argue with you.
At the close of 2008, Amazon was trading at little over $3 per share. Today, Amazon trades for $140 a share. In contrast, at the close of 2008, Kraft Foods traded for a little over $37 per share. Today, it trades for a little over $32 a share. Thus, while there is a decent chance you would have made a profit on Kraft had you bought this stock in 2008 (mainly due to dividends), ultimately, Amazon would have been the far better investment.
However, in this hypothetical, I’ve left out an important piece of data: you are visiting this financial advisor two weeks after September 15, 2008, the day that Lehman Brothers collapsed and the world stood on the precipice of what became known as the Great Recession. As a result, you would be making this decision when many were unsure which blue chip stock would be the next to fall, and your personal financial decision would reflect anxieties from real-world events.
Knowing this piece of information, how would your answer change? Arguing that one should choose Amazon would be much harder if you are being realistic, because, in this context, you are faced with the possibility of losing a great deal of money investing in one stock versus the relative stability of a less popular stock.And faced with this choice, most people will choose to gain less money to avoid losing any money.
This is lost aversion.
In 1979, Amos Tversky and Daniel Kahneman wrote a paper entitled “Prospect Theory: An Analysis of Decision Under Risk”; it would not be hyperbole to say that this paper was the first shot fired in their cognitive revolution. What they establish in this paper is something they call the “certainty effect,” the idea that “people overweight outcomes that are considered certain, relative to outcomes which are merely probable.”
Returning to the hypothetical, most people care far more about not losing money than the possibility of making a lot of money. As a result,
Let’s say I have $100 to invest.
At that time, on a happiness scale from 1-10, I give myself a 5.
In one scenario, I make the investment and lose $100. In another scenario, I make the investment and make $100.
While of course, I will be happier making money rather than losing it, in theory, I should be more or less happy in equal amounts if the amount I make or lose is the same. So, if I make $100, my happiness should rise from 5 to 7, and if I lose $100, my happiness should fall from 5 to 3. The results should be symmetrical.
However, what Kahneman and Tversky find is that the results in this scenario are asymmetrical; the feelings of loss are significantly higher than gains. So if I lost $100, my happiness falls from 5 to 1, whereas if I make $100 my happiness only rises from 5 to 7.
This fear of loss may be hardwired into the human brain. In 2007, Russell A. Poldrack and a group of researchers found that “the brain regions that process value and reward may be silenced more when we evaluate a potential loss than they are activated when we assess a similar-sized gain.”Thus, in returning to the original example, loss aversion is one of the several reasons why one is less inclined to invest money in a risky stock where there is a chance of losing all of their money, as opposed to picking a more conservative stock where the risk of loss or gain is lower.
Chances are you can think of numerous examples of loss aversion. Almost any transformative change in an organization will involve loss, whether through temporary loss of funds, staff, members, etc. And those losses will weigh on people far more than the potential gains. And even when things do work out, many will still remember what was lost over the potential gains. As such, people often opt for the status quo largely because the probable benefits feel less significant than the certain losses.
And if loss aversion is real (and all research suggests it is), we need to start thinking about how we use incentives to encourage the changes we want to see in the face of conflicting signals that will lead to inertia.
If you are a manager, perhaps you read the previous section and thought, “Yes! This is what I’ve been trying to do with our employees. They will not accept the need to change.”
Not so fast.
Yes, sometimes leaders encourage people to change, and people resist. However, resistance to change often stems from conflicting incentives between what the leader says and how the organization operates. To explore this contradiction, read Uri Gneezy’s Mixed Signals.
Gneezy is a behavioral economist who wants us to understand the power of incentives with a twist. Gneezy recognizes that incentives exist to encourage behavior, and the behavior we want to encourage is often what is said in a staff meeting, marketing materials, etc. However, sometimes, incentives can quickly go awry when what you implicitly encourage differs from what you explicitly incentivize.
Take bus drivers.
In theory, transportation departments want bus drivers to get as many passengers from place to place as fast and safely as possible. However, most municipalities pay their bus drivers by the hour, meaning that drivers are paid based on filling a required amount of time, regardless of how many people they serve in that timeframe. Gneezy would call this a “mixed signal,” where what may be communicated as the goal conflicts with the system's incentives. However, Chile pays their bus drivers by passenger, meaning there is an incentive for the bus drivers to transport more riders faster. The goal communicated aligns with the system’s incentives.
This example is another way to understand the power of losses. Suppose people are already inclined to value losses more than gains. In that case, leaders need to work extra hard to ensure that our organizational incentives align with the incentives of the people who actually do the work. The alternative is organizational inertia, likely to frustrate everyone and please no one.
So, How Do Incentives Really Work?
Chances are Adam Grant and Uri Gneezy will have some insights…
What I Read This Week
Elon Musk’s Shadow Rule: Elon Musk is everywhere, and that’s not always good (and this week, it’s definitively bad.) This detailed and nuanced profile in The New Yorker provides some insight into one of the enigmas of our time. But no matter what you think, I’m still calling it Twitter.
What If We Chose Leaders by Lottery?: Adam Grant broke my brain. In a good way. As someone who takes far too much interest in the trials and tribulations of choosing organizational leaders, completely tearing down the system made me think.
Why Do We Want Problems To Be Someone’s Fault?: One of my mentors once taught me, “When people can’t figure out what went wrong, they will look for who went wrong.” When we have a problem, we want to blame someone, even when no one is to blame. Here’s an analysis of why.
What Happens When We Use ChatGPT 5 Minutes Every Day: I don’t use ChatGPT daily, and it’s hard to imagine when I would. However, one person decided to use it for five minutes daily, and here’s their account of what happened.
Nonprofits Still Can’t Find Workers: This problem is not going away.
If you are trying to read between the lines, as they say in Jewish tradition, “those who get it, get it.”
This hypothetical is based on personal experience. My wife and I were married on August 31, 2008, and a month later made our first investments. Although our financial advisor did not advise us to buy Amazon, I cannot imagine us taking the risk of investing in Amazon during that time, even if he did. This is a counterfactual with some of the facts changed.
For the record, we chose stocks very similar to Kraft Foods; unlikely to explode in value, but highly unlikely to go bankrupt. As our financial advisor said, “People still need to eat.”
No, I do not rate my daily happiness using this scale…yet?
I have no research to support this statement, but as an avid reader of all things Moneyball, I’ve noticed over time that a sizable number of researchers in this space are Israeli or Israeli-born. Perhaps this is because Amos Tversky and Daniel Kahneman, the OGs of Moneyball, are Israeli. But thinkers such as Dan Ariely, Maya Bar-Hillel, and Eldan Shafir are also Israelis featured in this newsletter, and not all of them were the direct students of Tversky and Kahneman.
If there is one banner headline from one year of articles, let it be this:
“Skilled leaders first assume they are the problem before they blame people below them for not changing.”
Worst case, people appreciate that you are self-aware enough to consider the possibility. Best case, you actually are the problem and can focus on fixing it.
Synagogues are a great example of this. Every synagogue I know says that they want to be welcoming to new people, particularly younger people. However, too many synagogues still bristle at the idea of giving free samples to encourage membership and commitment over time, arguing that people need to “pay their fare share.”
This is a classic mixed signal. Welcoming someone into a community requires investing in their growth with the potential to gain over time. However, paying for membership sends a signal of commitment now. While it is wonderful when someone joins a community before participating, those are the exceptions, not the rule. As a result, the incentives of a community should be aligned in such a way that growth over time is the priority.
I will leave it up to you, dear reader, to think about whether or not that is actually how most communities function.